Chris Leahy
Chair, President and Chief Executive Officer at CDW
Thank you, Steve, and good morning, everyone. I'll begin today's call with a brief overview of our performance, strategic progress and view for the balance of the year. Al will provide additional details on our results, our capital allocation priorities and our outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions.
The team continued to execute extremely well under persistently challenged conditions. Commercial markets remained cautious and conditions in international markets worsened. Public markets held firm.
For the quarter, the team delivered net sales of $5.6 billion, 8% lower than last year, record non-GAAP operating income of $556 million, up 1% year-over-year, and record non-GAAP net income per share of $2.72, up 4% year-over-year, record profitability that underscores the power of our strategy when underpinned by our resilient business model and financial rigor, profitability driven by relentless execution and profitability that is a clear demonstration of the value we deliver our customers.
Customers maintain their laser focus on mission-critical priorities and optimizing costs. And once again, our deep and broad portfolio enabled the team to pivot to solutions that address our customers' priorities, solutions that provide operating efficiency and expense elasticity like burstable performance in modern, hybrid and multi-cloud environments or solutions that are usage based, like SaaS and private cloud, solutions we are well-positioned to deliver.
In today's environment where customers are closely scrutinizing their IT spend, our value as a trusted advisor is greater than ever before, an advisor who helps customers cut through complexity and evaluate options, an advisor who designs, deploys, integrates and many times manages the solution. Capabilities made possible by the investments we have made in our three-part strategy for growth, investments that enable us to serve customers across the full stack and full lifecycle, investments that have made us a vital technology partner.
As we've executed our strategy, the amount that customers spend with us has consistently grown faster than net sales, a dynamic that reflects both the success of our strategic investments and increasing customer preferences for cloud and SaaS-based solutions. Recall that these offerings drive significant customer spend that are not -- that are netted down in our sale and thus dampen our top line growth while enhancing our gross margin.
Let's take a deeper look at quarterly results. There were three main drivers of performance: our balanced portfolio of customer end markets, our breadth of solutions and services portfolio, and ongoing execution of our three-part strategy.
First, our balanced portfolio of end markets. Each of our five sales channels, corporate, small business, healthcare, government and education, is a meaningful business on its own with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography, verticals and customer size. Teams are similarly segmented in our U.K. and Canadian operations, which together delivered $2.9 billion in 2022 sales.
These unique customer end markets often act counter-cyclically given the different macroeconomic and external factors that impact each. You see the benefit of our balanced portfolio again this quarter with public performance partially mitigating declines in commercial.
Commercial market conditions continue to weigh on customer confidence and drive cautious purchasing behavior. Instead of the modest improvement in hardware we expected, we continue to experience pressure particularly in client devices.
Corporate net sales decreased 12%. Momentum continued around projects focused on increasing productivity as well as projects focused on enhanced customer and coworker experiences, with a shorter-term ROI lens, customers' favorite [Phonetic] solutions enabled by cloud, which contributed to double-digit increases in corporate customer spend on cloud.
AI and security were also major customer focus areas with CIOs increasingly being asked two questions. What are you doing with AI? And how are you protecting our data? While AI remains in early stages of commercialization and development, and not yet translating into meaningful customer spend, our full portfolio of security offerings contributed to double-digit increase in security spend.
Ongoing network modernization also led to excellent netcomm performance, once again up double digits. Corporate top line performance continued to reflect meaningful year-over-year client device declines, with ongoing postponement of upgrades and utilization of existing products.
Small business net sales declined 22%. Market conditions were consistent with the second quarter and customers continue to seek clarity around the economy and more conducive conditions for hiring and new business formation. Focus remained on cost management and the prioritization of products -- projects that need to get done. Projects that were more wants rather than needs remained hot.
Consistent with the second quarter, solutions increased up low-single digits, while transactions declined by double digits. Focus on shorter-term ROI for mission-critical priorities drove double-digit spend in cloud and software. Client devices continued to drive small business top line performance as refresh remained on the back burner and declines were on par with the second quarter.
Public sales increased 1% year-over-year. Healthcare and education each posted a 2% increase, while performance was flat in government compared to last year's exceptional near 40% growth. Government performed relatively in line with historical seasonality with federal's mid-single-digit growth offset by a mid-single-digit decline in state and local. The federal team continued its success helping agencies implement more efficient solutions to manage and protect data. This delivered excellent server performance up strong double digit. The team also continued its work with agencies to optimize existing cloud investments and deliver new cloud solutions, which require a rigorous proof of concept.
The state and local team delivered solid sequential growth, well above historical averages, up 4%, but net sales declined mid-single digits compared to last year's double-digit growth. Solid solutions growth was more than offset by a decline in transaction. Cloud-enabled solution adoption was strong, delivering double-digit increases in customer spend.
Healthcare net sales increased 2%. Augmenting talent needs, modernizing data centers and driving cost savings and efficiency projects remained focus areas for customers. With complex industry challenges and tight operating budget, healthcare systems continue to turn to cloud solutions. Armed with our full portfolio, which includes proprietary cloud-based healthcare solutions, the team drove a significant increase in cloud spend.
Our broad portfolio of solutions also contributed to a double-digit increase in security spend growth as they helped customers address heightened cybersecurity needs, needs driven by the disproportionate percentage of all ransomware attacks that target healthcare organizations.
For education, net sales increased low-single digits, the first positive growth quarter for education in over eight quarters. K-12 low-single-digit increase more than offset a low-single-digit decline in higher ed. Higher ed's high-single digits increase in solution was offset by a double-digit decline in transactions, a decline largely driven by ongoing declines in client devices.
Institutions continued to invest to improve security, campus connectivity and student experiences. The team's continued focus on delivering these impactful solutions led to double-digit growth across netcomm, services and software. It also delivered low-teens growth in cloud spend. For K-12, the team continued their success helping schools in their efforts to achieve digital equity and improve learning outcomes, which delivered excellent growth in services and netcomm [Phonetic]. Solutions grew meaningfully while transactions declined low-teens, reflecting ongoing moderation of client device spend. Security remained a key focus area with double-digit growth in customer spend.
Other, our combined U.K. and Canada business, came in below our expectations, down mid-teens. While the teams continued to execute well, the deterioration in market conditions in the U.K. and Canada were deeper than we anticipated. Both the U.K. and Canada decreased by double digit in local currency. Our diverse end markets are both a key strategic advantage and enable consistent performance amid an uncertain and uneven macro environment.
The second strategic advantage and driver of our performance was our broad and deep portfolio, which enables us to pivot to address our customers' evolving needs. Similar to the second quarter, solution sales increased mid-single digits, while transactions remained under pressure down high-teens. Hardware declined by double digits. Similar to the second quarter, performance continued to reflect depressed client device demand, particularly in the commercial space. Overall, client performance was roughly in line with the second quarter's double-digit decline.
Netcomm increased double digits with stable demand. Backlog continues to feather out and it's now approximating historic levels. Cloud spend increased nearly 20% with increases across every end market. Roughly half of our total third quarter cloud spend came from commercial customers and half from public.
Security spend increased by double digits with a significant portion being delivered via software and the cloud. Cloud and security's success contributed to a mid-teen increase in software. Increases across virtualization and network management and security were partially offset by declines in categories tied to full stack projects and employment levels.
Solid managed and professional services growth was more than offset by the impact of continued drag from lower services attached to transactional and solutions hardware, and overall services net sales declined.
As you can see, performance varied significantly across the portfolio. That is the power of our deep and broad portfolio. It enabled us to meet our customers where they are, and it is a power -- and it is power driven by the investments we have made in our growth strategy.
And that leads to the third driver of our performance this quarter, relentless execution of our growth strategy, a strategy guided by three pillars: first, capture share and acquire new customers; second, enhance capabilities in high-growth solutions area; and third, expand services capabilities.
Over the past five years, we have broadened and deepened our capabilities. Our comprehensive lifecycle management capabilities now deliver design, deployment, integration and management, capabilities that have deepened our relevance to customers and fortified our role as trusted advisor to our customers, capabilities that enable us to best serve customers across physical, digital or cloud-based environment in the U.S. and internationally, and capabilities that drive favorable outcomes for our customers.
In today's uncertain macro environment with the customers increasingly reluctant to make big upfront capital investments, our ability to deliver the cost savings outcome of our ICARE framework is a major competitive advantage. Armed with our consultative approach to problem solving, the teams both identify and implement consumption-based solutions with lower upfront costs, solutions that enable customers to move ahead with mission-critical projects, solutions that deliver value to our customers and deepen customer relationships.
Many of these solutions are enabled by our cloud-ready assessments, enablement and migration services, which are second to none in the industry. A great example of this in action is the solution we provide into Illinois school district that had a legacy converged storage environment reaching end of life. The customer had three priorities: first, student, teacher and administrator experience; second, agility to meet -- excuse me, agility to meet end of school year deadline; and third, deliver cost that they manage within the strength of their fixed budget.
After a comprehensive evaluation of the wide range of on-premise and hybrid cloud solutions we can provide, the team determined that a consumption-based approach would provide the best outcome for the customer, ultimately developing a private cloud hyperconverged solution, a solution that supports deployment and management of modern applications and provides the ability to seamlessly scale for future growth, one that delivers needed flexibility and cost predictability and deepened our relationship as a trusted advisor; another great win-win.
Investments in our customer-centric growth strategy are foundational to our ability to consistently and profitably outgrow the U.S. IT market, and that brings us to our expectations for the rest of the year. You will recall last quarter we shared our expectations for the U.S. IT market to post a decline of high-single digits in 2023. This assumed three things: first, greater clarity in the market will lead to a modest improvement in the commercial IT hardware market in the back half of the year; second, a moderate deterioration in the U.K. and Canada; and third, a return to normal seasonality in the public space.
We did see a return to normal seasonality in public. And while commercial spend has been stable, there was a greater shift to solutions that net down in lieu of IT hardware spend. We also saw a deeper-than-expected international market deterioration. Current conditions [Indecipherable] customer interactions lead us to expect these trends to continue. Our estimate of U.S. IT market growth in 2023 remains at a high-single-digit decline, and we continue to expect to profitably outperform the U.S. IT market by 200 basis points to 300 basis points when adjusted for this year's meaningful shift in customer spend towards complex solutions that net down.
We are cognizant of the significant wildcards our customers in the market state in this environment, a list that has grown more complex and now includes intensifying geopolitical instability and potential for federal government shutdown. We will continue to keep a watchful eye on these and other potential factors as we always do, and we will provide an update at -- on business conditions on our next call. In the meantime, we will continue to do what we do best, leverage our competitive advantages and out-execute the competition.
Now let me turn it over to Al, who will provide more detail on our financials and outlook. Al?
